Professional Documents
Culture Documents
The Evolution of The Pharmaceutical Industry
The Evolution of The Pharmaceutical Industry
Department of Technology and Management, and CRIOS, Bocconi University, Milan, Italy;
Institute for Advanced Studies, Pavia, Italy; cCRIOS, Bocconi University, Milan, Italy
This article provides an overview of the main traits of the historical development of the
pharmaceutical industry, using the lenses of the evolutionary approach to economic and
industrial change. After a brief overview of the main evolutionary concepts which
guide the subsequent discussion, our presentation identifies four main eras: from the
formative stages (from the late 1800s to War World II) to the so-called Golden Age
(the 1940s to the mid-1970s), the biotechnology revolution (the 1970s to the new
millennium, approximately) and what we label the Winter of Discontent? (the first
decade of the new century). Within all these epochs, we discuss the main trends in
technology, firms strategies and structures, patterns of competition, demand,
regulation and institutional developments. Section 6 concludes the article, briefly
discussing some main implications for the present and future of the industry on the one
hand and for the relevance of an evolutionary approach to the analysis of corporate and
industrial change on the other.
Keywords: Industry evolution; Pharmaceutical industry; Evolutionary theory;
Technological change; Regulation and institutions
1. Introduction1
There are various reasons why the history of the pharmaceutical industry can be fruitfully
analysed in an evolutionary perspective. Firstly, at the most basic level, pharmaceuticals
have been continuously changing over more than a century as the result of the interaction
of exogenous shocks and as the endogenous outcome of the response of a variety of agents
to emerging scientific, technological, market and political opportunities and constraints.
Secondly, these agents are diverse: they include consumers and profit-seeking firms as
well as regulatory agencies, universities and research centres, political bodies, etc. Such
agents are also heterogeneous in their preferences and motivations, in the ways they have
been perceiving and reacting to opportunities and constraints as well as in their strategies,
forms of organisation and performance.
Thirdly, the differential performances of the firms active in the industry have been
shaped by the interaction of processes of learning (technological, organisational, market)
and (product and financial, political, etc.) selection as well as, crucially, by the
accumulation of chance events.
Fourthly, the pharmaceutical industry has been traditionally highly innovative,
although imitation, marketing and price competition as well as political lobbying
remain crucial aspects of the competitive process. Over time, firms have developed
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665
capabilities in all these domains. Some of them have become world leaders and maintained
their dominant positions over prolonged periods, while others have prospered only in
national market niches. Other have exited, often being acquired by competitors.
Fifthly, the firms organisational forms and the aggregate structure of the industry have
emerged as the outcome of a co-evolutionary process. A distinguishing feature of
pharmaceuticals is that concentration has remained rather low as compared to other
Research and development (R&D)- and marketing-intensive sectors. A remarkably stable
and relatively small group of firms has been consistently dominating the industry, almost
from its inception. However, the market share of these companies has been always lower
than 10% and only very recently has the current largest firm been able to grow larger than
this threshold, mainly through mergers and acquisitions.
This article examines the main features of the evolution of the pharmaceutical industry
in its historical development.2 After a brief overview of the main evolutionary concepts
which guide the subsequent discussion of pharmaceuticals (Section 2), our presentation
identifies four main eras: from the formative stages (from the late 1800s to War World II)
to the so called Golden Age (the 1940s to the mid-1970s, Section 3), the biotechnology
revolution (the 1970s to the new millennium, approximately, Section 4) and what we label
the Winter of Discontent? (the first decade of the new century, Section 5). Within all
these epochs, we discuss the main trends in technology, firms strategies and structures,
patterns of competition, demand, regulation and institutional developments. Section 6
concludes the article, briefly discussing some main implications for the present and future
of the industry on the one hand and, on the other, the relevance of an evolutionary
approach to the analysis of corporate and industrial change.
2.
The basic building blocks of the evolutionary approach to industrial change are well
known.3 Here, in extreme synthesis we summarise the basic concepts and assumptions
which will guide the following discussion of the evolution of pharmaceuticals.
First of all, our historical account is evolutionary in the basic sense that the primary
object of the analysis is corporate and industrial change rather than the identification of
equilibrium conditions which are then (somehow) attained by rational, perfectly informed
agents. Instead they are described as being only imperfectly able to understand the
environment in which they act, let alone to make accurate forecasts of the future.
Economic behaviour is then conceptualised as being largely driven by rules and routines,
which are developed over time as robust solutions to recurring problems and which are
painfully modified when new circumstances arise and performance deteriorates below
acceptable levels. Behaviour is therefore intrinsically characterised by some degree of
inertia. Yet, for the same reasons, innovation is always possible and marks the historical
unfolding of events.
Secondly, our analysis of pharmaceuticals is evolutionary in the sense that it rests on a
specific conceptualisation of what firms are and of what they do. An evolutionary approach
understands firms as behavioural entities which are primarily characterised as sets of
specific and idiosyncratic productive, technological and organisational capabilities, stored
in and expressed by their routines. Such capabilities are learned over time and they define
what any particular firm is capable of doing at any time and the range of new things that it
can learn to do in a reasonable period of time. Capabilities can be modified in the longer
term by more explicit strategic orientations. Still, learning typically proceeds along
trajectories which are constrained and structured by the nature of the problem itself
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667
The fragmented nature of the drug market in multiple, independent submarkets further
prevented the establishment of monopolistic positions in the industry.7
In addition, an evolutionary approach highlights two further fundamental factors
shaping industrial dynamics: luck and increasing returns. The accumulation of chance
events over time can produce structured patterns of market structure (e.g. concentration).
Increasing returns can arise from mechanisms involving scale economies in R&D,
learning curves, marketing efforts or so-called network externalities. But what is
particularly relevant is that increasing returns reinforce the essential dynamic nature of the
analysis: market power is built over time as a consequence of sequences of actions in
various domains.
Finally, an evolutionary approach focuses attention on the various aspects of the
institutional setting in which the industry operates: intellectual property law, regulation,
the scientific and technological background, etc.. Evolutionary theory highlights that firm
behaviour and structure and processes of industrial change are embedded in a rich
structure of institutions. The now enormous literature on innovation systems has
developed and fleshed out this suggestion, examining matters ranging from cooperative
arrangements among firms, the role of universities in technological progress and modes of
university-industry interaction in different industries, the variety of government
programmes supporting technological advance, and related matters.8 Other relevant
institutions pertain to the political economy of socio-economic arrangements governing
how firms are organised and managed, labour markets, finance/industry relations,
corporate laws, etc.9 Even more fundamentally, institutions are conceived in an
evolutionary approach as social technologies, i.e. the system of norms, beliefs and social
practices shaping the ways of doing things.10
For all these reasons, firms and industry evolution is largely characterised by path
dependence. Capabilities, forms of organisation, market structures and institutions change
over time on the basis of previous history. And in order to understand observed
phenomena at time it is necessary to reconstruct past history.
3.
3.3 Factors sustaining innovation and industry growth: demand and patent protection
A further fundamental pillar of the development of the industry in the US and Europe was
indeed the rapid growth of demand for drugs, driven by population growth, rising living
standards and the vastness of unmet medical needs. The growth of the health care
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669
insurance in the US and of the Welfare State in most European countries further provided a
large, rich and organised market for drugs.
In the US in particular, demand was further sustained by other factors: the sheer size of
the domestic market and the high prices of drugs.
Pharmaceuticals has historically been one of the few industries where patents provide
strong protection against imitation.18 However, most countries the UK and the US being
notable exceptions allowed only for process, rather than product, patents.19
A major turning point occurred however in 1946, when the US Patent Office granted a
patent to streptomycin overturning previous decisions which denied patentability to
antibiotics as naturally occurring substances. Since then, the patent regime in
pharmaceuticals has become increasingly tight, despite recurring debates and
controversies. In addition, imitation, and hence price competition, was made harder by
legislation concerning generic versions of the original product. Until the WaxmanHatch
Act was passed in the US in 1984, generic versions of drugs that had gone off patent
protection still had to undergo extensive human clinical trials before they could be sold in
the US market, so that it might be years before a generic version appeared even once a key
patent had expired. In 1980, generics held only 2% of the US drug market.
Measures to strengthen patent laws in pharmaceuticals spread all over Europe during
this period, but at a highly differentiated pace. France introduced product patents in 1960,
Germany in 1968, Japan in 1976, Switzerland in 1977, Italy, Netherlands and Sweden in
1978, Canada and Denmark in 1983.
In many cases, as in Japan and Italy (and possibly France), the absence of product
patent protection induced firms to avoid product R&D and to concentrate instead on
finding novel processes for making existing molecules. In these countries, the
development of me-too drugs, inventing around and getting licenses from other
companies became the main research activity. In other cases, primarily Germany and
Switzerland, but also in Sweden, the absence of product patent protection did not seem to
produce such negative effects. Similarly, the reforms of patent laws do not appear to have
had a visible and significant impact on the innovative capabilities of industries like the
Italian or the Japanese ones. If anything, they might have had a negative effect, further
weakening national industries mainly composed by generic producers.20
3.4
The take-off
As a consequence, the basis was laid for the transformation of the industry into a highly
innovative, profitable and high-growth sector. Many firms set up large formalised in-house
R&D programmes. In the US, companies like Merck and Pfizer, previously important
suppliers of fine chemicals, entered the drug market through innovation-based strategies.
The rate of innovation started to soar: the R&D to sales ratio rose from 3.7% in 1951 to
5.8% in the 1950s to around 10% in the 1960s, reaching around 15 20% in the 1980s and
afterwards.21
In the following two decades hundreds of new chemical entities (NCEs) and several
important classes of drugs were discovered and introduced, ranging from antibiotics to
antidepressants to diuretics, etc. Correspondingly, the number of new molecular entities
approved by the Food and Drug Administration (FDA) rose steadily from 25 in the period
1940 1949 to 154 in the 1950s to 171 in the 1960s, and reached 264 in 1970s.22
The industry began also to invest heavily in sales efforts and marketing. Whilst, until
the 1930s drugs were sold and advertised mainly directly to patients, subsequent
legislation introduced prescription drugs. In 1929 the latter accounted for 32% of
Throughout all its history, the pharmaceutical industry has been characterised by relatively
low levels of concentration, especially when compared to other R&D and marketing intensive
industries. Up until the mid-1990s, no firm had a worldwide market share larger than 4.5%.
The four firm industry concentration ratio (the concentration ratio of the largest four firms in
the industry) (CR4) index was equal to 28% in 1947, 24% in 1967 and 22% in 1987.24
From the outset, this industrys market structure has been characterised by a core of
leading firms and a large fringe of smaller ones. No clearly dominant position has emerged
in the US and in the other large European economies. Within this core of the first 10 20
largest firms around the world, competition is intense; changes in the hierarchy of the
leaders occur but, despite this mobility within the core, the club of the major firms has been
remarkably stable.25 Similarly, entry has not been a significant phenomenon at least until
the biotechnology revolution.
The oligopolistic core of the industry has been composed of the early Swiss and
German firms, joined after World War II by innovative American and British companies.
Many of the leading firms during this period companies such as Roche, Ciba, Hoechst,
Merck, Pfizer, and Lilly had their origins in the pre-R&D era of the industry.
Innovative new drugs arrived quite rarely but after their launch they experienced
extremely high rates of market growth. In turn, this entailed a highly skewed distribution
of the returns on innovation and of product market sizes, as well as of the intra-firm
distribution of sales across products. So, a few blockbusters dominated the product range
of all major firms.26
This picture looks somewhat different, however, at the level of the individual
submarkets or therapeutic categories, such as, for example, cardiovascular,
diuretics, tranquilisers, etc. The largest firms held indeed dominant positions in individual
submarkets. In some of them such as antiviral products the CR4 index was above 80%
in 1995. In many others only two or three drugs accounted for more than 50% of the
market sales.27 Yet, even in submarkets, dominant positions are temporary and
contestable.
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671
Three factors may explain the patterns observed in pharmaceuticals. First, imitation
plays a crucial role. There is little question that large innovative firms enjoyed strong
isolating mechanisms protecting their profits, such as patents and the organisational
capabilities developed by the larger pharmaceutical firms. In addition, under the random
screening paradigm, spillovers of knowledge between firms were relatively small.28 Yet,
innovation and the introduction of really new drugs were only part of the competitive story
in pharmaceuticals. Inventing-around existing molecules, or introducing new
combinations among them, or new ways of delivering them, etc. constitute a major
component of firms innovative activities broadly defined. Thus, firms also competed
through incremental refinements of existing drugs over time, as well as through imitation
after (and sometimes even before) patent protection had expired. Thus, a large fringe of
firms could thrive through commodity production and development of licensed products:
price competition has also always been intense. Indeed many firms did not specialise in
R&D and innovation, but rather in the production and marketing of products invented
elsewhere. This group of firms included not only large companies like Bristol-Myers,
Warner-Lambert, Plough, American Home Products, but also many smaller producers as
well as almost all of the firms in countries like France, Italy, Spain and Japan.
Second, in this industry the innovative process was characterised not only by rich
opportunities but also by high uncertainty and, above all, by the difficulty of leveraging the
results of past innovative efforts into new products. In other words, economies of scope
and cumulativeness of technological advances were limited. Hence, innovative firms have
only limited room for establishing persistent dominant positions. Concentration can still
arise through success-breeds-success processes: an innovative firm enjoying high profits
may have more resources to invest in R&D and therefore higher probabilities to innovate
again as compared to non-innovators. However, to the extent that the probability of
success of any one project is independent from past history, the tendency toward rising
concentration is weakened.
A third crucial factor limiting concentration is the fragmented nature of the
pharmaceutical market. The pharmaceutical market results from the aggregation of many
independent submarkets with little or no substitution between products. Thus, even
monopolistic positions in one submarket do not translate into overall concentration, if the
number of submarkets is large and their size (relative to the overall market) is not too
skewed. As the number of submarkets increases, it becomes more difficult for one firm to
dominate a larger, fragmented market. If the assets and knowledge that are necessary to
gain market shares in one submarket cannot be easily used in different submarkets (as is
the case not only for R&D but also for marketing), there is a high probability that different
firms end up dominating the different niches.
3.6
The spectacular growth of the pharmaceutical industry co-evolved with regulation. There
are, of course, multiple reasons justifying public intervention in the market for drugs.
Many of these reasons can be explained in terms of market failures and standard economic
efficiency.29
The market for drugs is inherently characterised by information asymmetry. Producers
have more information on the quality of drugs than consumers do. Moreover, it is the
prescribing doctor who makes the decision, but even doctors often do not know in detail
the properties of a drug, especially when it is a new one.
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673
exceptions. Third, since the early 1960s, most countries have steadily increased the
stringency of their drugs approval processes. In the US the 1962 KefauverHarris
Amendments introduced a proof of efficacy requirement for approval of new drugs and
established regulatory controls over the clinical testing of new drug candidates. Despite
the hostility of the industry, the size, costs and stringency of these trials have been
increasing ever since, at least until the mid-1990s and led to substantial increases in R&D
costs and to longer gestation times for NCEs.30 Yet, it has also been argued that the
creation of a stringent drug approval process in the US may have also helped create a
strong competitive pressure favouring really innovative firm strategies, because it
significantly increased barriers to imitation, even after patents expiry.31
4.
4.1
Since the mid-1970s all the factors that had sustained the Golden Age have undergone
fundamental changes. These transformations have created the need for new strategies and
organisational arrangements at the level of firms and industry. But, they have also interacted with
broader changes in the geography of health care and drug production: new countries are now
entering the club of producers and they are expressing not only a powerful economic but also an
especially social and political demand for health care. Let us discuss these changes in turn.
4.2 Science, change in the knowledge base and the biological revolution
Beginning in the early 1970s, the industry began to benefit more directly from the
explosion in public funding for health related research. Progresses in pharmacology,
physiology, enzymology, and biology led to a deeper knowledge about the understanding
of the mechanisms of action of drugs as well as of the diseases. In turn, these advances
opened up the way for new techniques of research, that have been named guided search
and rational drug design, that made it possible for researchers to screen and design
compounds with specific therapeutic effects. Further, advances in DNA technologies and
molecular genetics introduced a profound transformation in the knowledge base and in the
forms of organisation of firms and of the industry as a whole. This revolution has changed,
quite drastically, the competitiveness of individual firms and national industries. Europe,
from a position of dominance, started to lag behind the US.32
The birth date of the so-called biotechnology industry is customarily identified as
1976, when Genentech the first specialised biotechnology company was founded by a
scientist and a venture capitalist. In the following years, the industry bloomed, with
significant investments by the incumbents and, particularly since the early 1980s the
entry of a multitude of new firms. The transformation of the industry followed a model
which was partly inherited by the experience of information technologies. This model was
based on three main pillars: the commercialisation of scientific research, venture capital
and a strong Intellectual Property Rights (IPR) regime.
To begin with, basic research has taken a much more direct economic relevance for
firms as compared to the previous era. Existing corporations had to learn the new relevant
scientific base and to absorb it in their strategies and organisation. To a significant extent,
these processes required the establishment of tighter relationships with universities and
with the new specialised biotechnology firms.33
Second, scientific research started to become a commercial and an entrepreneurial
activity, mainly through the development of technology transfer offices within universities
The development of the biotechnology industry was made possible by radical changes in the
IPR regime. Since the 1980s and in the US, in particular, various actions and court decisions
introduced reforms essentially aimed at saving the cost and time linked to patent procedures;
extending patent duration for some classes of products, most notably drugs; and
encouraging non-profit research institutions to patent and market technologies developed
with public funding. Moreover, a series of court cases in the mid-1990s overturned previous
practices, granting patents on upstream research and significantly extending patents scope,
even to cases where the practical application of the patented invention had not been clearly
demonstrated: the Bayh-Dole (1980) which facilitated the patenting and licensing of the
results of publicly funded research; the US Supreme Court rule (1980) in favour of granting
patent protection to living organisms (Diamond v. Chakrabarty); the newly established
Court of Appeals for the Federal Circuit (CAFC) supported the equivalents doctrine,
through which inventors were protected not only from imitative products and processes, but
also from those substantially similar. In addition during the 1980s the doctrine of utility by
which the practical and commercial utility of an invention should be clearly demonstrated
for the patent to be granted was substantially weakened.35
Finally, the adoption of Agreement on Trade-Related Aspects of Intellectual Property
Rights (TRIPS) in 1994 extended and homogenised patent protection in all countries
participating in the World Trade Organization (WTO). With specific reference to drugs,
the patentability of molecules became mandatory in all member countries, and the length
of patent protection was extended to 20 years. In addition to TRIPS, bilateral and regional
free trade agreements between the US, Europe and developing countries are introducing
further restrictions, such as requirements to extend the patent term, provisions preventing
marketing approval of a generic drug during the patent term without, the consent of the
patent holder and protection of test data submitted to regulatory agencies for marketing
approval through exclusive rights lasting at least five years
4.4 From the Welfare State to cost containment
As the scientific revolution and the IPR regime were beginning to transform the industry,
the levels and structure of demand also started to change. In the OECD countries, the real
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675
total pharmaceutical expenditure (in constant terms) grew at an average yearly rate of
3.5% in the 1980s and 4.6% from 1990 to 1996, on average 1.5% more than GDP growth
since the 1970s. Other factors, related to increasing prices of drugs and aging population,
contributed also to the rise of expenditures. Increasing pharmaceutical expenditure
implied growing pressure on public outlays. In a period characterised by mounting
concerns over budget deficits and over the extension of public intervention in the
economy, pharmaceutical expenditures became a primary target for expense reduction.
Criticism was directed also towards the inefficiencies that are generated by excessive
public coverage of drug expenditure and by command-and control measures like the
various forms of price controls.
Cost-containment considerations led to profound restructuring in the organisation of
the health systems. In many instances, these policies have implied the introduction of more
market-oriented forms of accounting, incentives and organisational structures. The
approaches towards cost-containment differ substantially across countries and over time.
However, a common trend is discernible towards the increasing use of policies aiming at
intervening on the demand side of the market to make patients and health providers
(doctors and pharmacists) more price conscious and more price sensitive, without or
irrespective of direct price controls.36 Moreover, price controls began to move away from
cost-plus based systems and to converge towards systems of reference pricing. Especially
in the US these developments were marked also by the appearance of new actors e.g.
the managed care organisations which induced a deep transformation in the structure
of the distribution system and more generally in the demand behaviour of the consumers,
by strengthening their bargaining position vis-a`-vis producers and integrating previously
fragmented purchasing decisions.
Finally, a crucial development was the introduction of legislation favouring the
diffusion and the opening of the market for generics. The introduction of the WaxmanHatch Act in 1984 significantly reduced the safety control procedures for generic drug bioequivalent to branded products and allowed pharmacist to sell equivalent generics instead
of branded products prescribed by doctors. Today generics are estimated to account for
more than 50% of drugs prescribed (in volume) and around 10% in terms of value.
5.
5.1
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677
Another interpretation suggests that the decline in productivity could be the outcome of an
intrinsic difficulty in discovering new drugs for increasingly complex pathologies: the low
hanging fruits have already been picked and now the challenge becomes harder.45 In this
respect, the stagnation in innovative output would be the outcome of an incumbent
maturity of the industry,46 characterised by a fall in innovative opportunities a little
like the mature phase in the life cycle of such industries as steel or automobiles.
Still, characterising pharmaceuticals as a mature industry looks awkward in the face of
the tremendous pace of scientific and technological progress. Nightingale and Mahdi
suggest that the biotechnology revolution has not, in fact, increased the productivity of
R&D because of the inability of drug firms to keep pace with the increased intrinsic
complexity of the biochemical problems that innovative search is addressing.47 Moreover,
the new science is still largely in its infancy.
In this respect, also, the biotechnology segment does not show a remarkable
performance. Hence, some perplexity has arisen concerning the efficiency not only of the
Big Pharma business model, but also of the structure and organisation of the
biotechnology industry. Ever since its inception, the model that sustained the emergence
of biotechnology in the US became extremely influential around the world, both in terms
of firm strategies and in terms of policymaking. Such a model has attracted innumerable
attempts at replication in almost all countries and regions in the world, trying to foster the
development of the biotechnology industry and of the local economy by promoting
scientific entrepreneurship, technology transfer, venture capital and tighter patent
legislations.
However, it has proved remarkably difficult to replicate this model outside the US and
more precisely outside the main regional American biotechnology clusters like the Boston
Area and California (San Francisco and Dan Diego); Cambridge, UK, is perhaps the only
major exception. It now well understood that the US model rests itself on a set of
institutional specificities which are by and large unique to the US context. They range from
the nature of the university system, to the markets for skilled labour, to the patterns of
corporate governance, to the structure of financial institutions, etc.48
Yet, while these institutional factors are certainly crucial, other variables may have
been equally or even more important. First, the sheer scale and scope of research:
overwhelming evidence indicates that absolute excellence in scientific research spanning a
differentiated spectrum of areas as well as integration along the horizontal and vertical
dimensions of the innovative process are crucial ingredients for the development of
biotechnology. Without these capabilities, the role of other factors appears to be ancillary.
Second, the American superiority in the life sciences derives to a significant extent from
the enormous amount of public funding to biomedical research.49
Not only has the replication of the American model been difficult outside the US,
increasingly it is questioned whether it is actually efficient.50 The new breed of
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679
biotechnology firms have failed to displace the old incumbents and only a tiny fraction of
biotech companies (Genentech, Amgen, Genzyme, Biogen Idec) have ever been profitable
or even able to produce positive cash flows. The few successful companies are typically
early entrants in the industry and their business model is quite different from what was
conceived as the hallmark of the new dedicated biotechnology firm: they have
transformed themselves into quasi-conventional pharmaceutical companies, vertically
integrated into manufacturing and marketing. Moreover, a very large fraction of the profits
come from orphan drugs designations, a market segment where many biotechnology firms
have specialised.51 Even the stock market performance of the industry does not appear to
be so spectacular (especially as compared to initial expectations) when risk and volatility
are adequately considered52
Also the technological impact of the biotechnology sector on pharmaceutical research
is less brilliant than it is commonly perceived. As Pisano shows, the average R&D cost per
new drug launched by a biotechnology firm is not significantly different from the average
cost per new drug launched by a major pharmaceutical company.53 Nor has the number of
compounds that make it to human clinical testing, let alone into the market, substantially
increased. In sum, it would appear that the biotechnology and genomic revolutions have
not yet substantially modified the intrinsically uncertain nature of the process of drug
discovery and development. Despite the spectacular scientific advances, our understanding of the causes of diseases and of the mechanisms of action of drugs remains poor
and innovation in this industry is still largely a random phenomenon. Thus, Pisano argues
that the organisation of the biotechnology industry in inherently flawed.54 Differently from
the earlier cases of semiconductors and software, the business of the new biotech firms is
not simply to provide and commercialise new technological advancements, but to achieve
scientific breakthroughs. In this view, the current structure of the industry is ill-suited to
cope with deep uncertainty, the need to integrate different highly specialised disciplines
and fragments of knowledge and to promote cumulative, collective learning.
As noted earlier, the current IPR regime does not promote easy circulation of
knowledge and cumulative innovation. Similarly, venture capital and the equity market
can only partially support the long time horizons implied by the extremely risky and
uncertain projects typical of pharmaceutical research. Perhaps, the enormous risks
involved in this kind of research can be more effectively managed by more long-term
oriented investment, less dependent on the creation of high expectations based on highly
incomplete information.55
Moreover, the process of vertical disintegration and specialisation might have gone too
far. There are undoubtedly great benefits coming from division of innovative labour
between companies specialised in the exploration phase and larger organisations
controlling the complementary assets necessary for the development and marketing of the
potential new products (the exploitation stage).56 Yet, the very process of
industrialisation of pharmaceutical R&D, with high fixed costs of drug discovery and
experimentation, raises the economic benefits and the need to integrate and cumulate
highly specialised, multidisciplinary knowledge.57 In this respect, biotech companies are
probably too small and too specialised to allow for the extraction of the full potential
offered by the progress of science. In other words, increasing division of labour has created
the need for stronger integration of knowledge. As it had happened in other industries,
however, deepening division of labour raises the risk that large firms progressively lose
their innovative capacities, and even their absorptive capabilities. Should this happen,
the large established pharmaceutical companies might become essentially marketingbased organisations, the function of which is to conduct clinical trials, get approval for the
Conclusion
Pharmaceuticals: A mature industry or the maturation of a new paradigm?
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681
In sum, we believe that business history and evolutionary theory have a lot to offer to each
other. History offers first the facts and the evidence which theory must try to explain.
An evolutionary explanation is historical in nature, as it focuses precisely on change and
on causal processes that unfold over time. In evolutionary theory, history matters because
in most cases the explanation of observed facts requires the reconstruction of previous
facts and behaviours.
In reverse, an evolutionary theory offers to historians a conceptual framework for the
interpretation of those facts. Such a framework can originate more specific interpretations
of particular historical phenomena like the evolution of the pharmaceutical industry and
other industrial sectors. These interpretations can be also formally modelled, with the aim
of checking the consistency of the proposed explanations. This is what some of us have
been engaging by developing so-called history friendly models of the evolution of
industries.59 Inevitably the modelling efforts end up calling for more and deeper historical
analysis.
Disclosure statement
No potential conflict of interest was reported by the author(s).
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Notes
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30.
We thank two anonymous referees, whose remarks greatly improved our article.
For a detailed discussion of the evolution of the pharmaceutical sector see, among others,
Pisano, The Development Factory; Henderson, Orsenigo, and Pisano, The Pharamceutical
Industry; Malerba and Orsenigo, Innovation; Sutton, Technology; Pammolli, Innovazione;
Grabowski and Vernon, 1994 and Innovation; Chandler, Scale and Scope and Shaping;
Galambos and Sewell, Network; Galambos and Sturchio, The Pharmaceutical Industry and
Pharmaceutical Firms; Gambardella, Science and Innovation.
Nelson and Winter, An Evolutionary Theory; Dosi and Nelson, Technical Change.
Dosi, 1982.
Bresnahan, Greenstein, and Henderson, Schumpeterian Competition.
Jacobides and Winter, Capabilities.
Breschi, Malerba, and Orsenigo, Technological Regime; Malerba F. Nelson R. Orsenigo L.
Winter S., 2016.
Freeman and Louc a, 2001; Lundvall, 1992; Nelson, 1993.
Nelson, 2006; Freeman, 2008; Hodgson, 1999.
Nelson and Sampat, 2001.
Murmann, Knowledge.
Chandler, Shaping.
Sutton, Technology.
Temin, Technology; Sutton, Technology.
Sutton, Technology; Gambardella, Science and Innovation.
Nelson, Uncertainty.
Pisano, The Development Factory; Henderson et al., The Pharmaceutical Industry.
Levin, R. Klevorick, A. Nelson R. and Winter S., 1987.;
According to Murmann (Knowledge) this did not represented an obstacle to the establishment of
the German dominance in chemicals and in pharmaceuticals before World War II. The concession
of strong product patents early on in the history of the British industry prevented the entry of new
firms and gave to few companies monopoly profits without having to develop strong competitive
capabilities. Moreover, frequent and costly litigation over patents among British firms further
weakened them. Conversely, the German system allowed the industry not simply individual
monopolists to grow and to build such competencies, also exploiting the ample possibilities of
infringing British patents. As the German industry established itself as the world leader in
chemicals, the domestic patent regime began to act as a reinforcing mechanism, providing further
incentives to innovate especially as it concerned processes and to build systematic R&D
efforts. The existence of a strong technical and scientific base and the development of technical
societies made it also possible for the patent regime to work in the interests of the industry. Indeed,
the German industry was very active in eliciting changes in legislation and in actually creating an
appropriability regime favourable to the industry itself. Conversely, in the British case the weaker
technical and scientific background on the one hand and the relative fragility of the domestic
industry on the other made it more difficult to design and impose a robust patent regime.
Scherer and Weisburst, Economic Effects.
Chetley, A Healthy Business?; Ballance, The Worlds Pharmaceutical Industries, cited in
Sutton, Technology; Inside Biotechnology & Pharmaceuticals, 1992.
Lichtenberg, 2006.
Chandler, Shaping.
Sutton, Technology; Over the last decade concentration has been increasing, despite the entry
of the new biotechnology firms and the expansion of the generic segment of the industry,
mainly as a consequence of mergers and acquisitions. Yet, in 2004, the largest pharmaceutical
firm held a world market share close to 10% and the CR5 concentration ratio was around 1/3 in
the US and in the EU, i.e. still denoting relatively low concentration.
Pammolli, Innovazione.
Matraves, Market Structure; Sutton, Technology.
Chong, Crowell, and Kend, Merck.
Pisano, The Development Factory; Henderson et al., The Pharmaceutical Industry.
See Comanor, The Political Economy and Scherer, The Pharmaceutical Industry, for
excellent reviews of these issues.
See for instance Chien, Issues; Peltzman, Regulation; Comanor, The Political Economy.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
Notes on contributors
Franco Malerba is a professor of Applied Economics at the Department of Management and
Technology at Bocconi University, Milan and President of CRIOS (Center on Innovation,
Organization and Strategy), Bocconi University.
Luigi Orsenigo is a professor of Applied Economics at the Institute for Advanced Studies at the
University of Pavia and Fellow of CRIOS (Center on Innovation, Organization and Strategy) at
Bocconi University.
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